Write an Intermediate Microeconomics essay (with graphs/calculus appropriately shown within the paper) along the following lines:

i) Draw and interpret a (simplified) figure illustrating the effects of a carbon tax (think supply and demand model in terms of consumer and producer surplus, deadweight loss, tax incidence, etc.): (around 75 words)

ii) Based on the above readings and others you have found, draw a graph comparing the effects of a carbon tax and of cap and trade: (around 75 words)

iii) (Focus of the essay) Describe the benefits and disadvantages of a carbon tax (especially some aspects that you might not able to incorporate and discuss in a graph). Please include the following in your discussion: (around 550 words)
a) Incidence of the tax / Producer and consumer surplus.
b) Price and quantity effects.
c) Differential elasticities of demand for different groups of demand (think for example about vehicle emissions).
d) Welfare implications of cap and trade vs carbon.

iv) In a few sentences, tell us whether in your personal opinion, the potential benefits of a carbon tax outweigh the disadvantages and costs discussed in some of these articles and explain why. If you think the goal of reducing pollution would be better served by some policy other than a carbon tax, what policy instrument would you use and why? (around 100 words)

Sample Solution

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